Spectrum - Culture, Media and Sport Committee Contents

Supplementary written evidence submitted by Hutchison 3G UK Ltd (Three)


1.1  Three welcomes the opportunity to respond to some of the points raised in oral evidence to the Committee.

1.2  In particular, we would like to address: the role of Mobile Virtual Network Operators ("MVNOs") in the mobile market; the perceived challenges and costs of increasing the 800MHz coverage obligation; the annual fees paid by the holders of the 900Mhz & 1800MHz spectrum licences; spectral efficiency; the immediate benefits of access to 900MHz spectrum and; differences between 3G and 4G services.


2.1  In oral evidence to the Committee on 28 June 2011, Vodafone explained that there were 20 notable, individually branded MVNOs in the UK. They told the committee that there was no evidence to show that operators that were unsuccessful in the auction would be unable to secure wholesale access agreements and that, where the market was seen to be operating non-competitively, Ofcom has the power to intervene. Telefonica, meanwhile, argued that market competitiveness in the UK is defined by "innovation, the number of people of people providing retail services, as well as the availability of capacity within the overall networks to be able to sell that capacity to customers".

2.2  We believe there are several points that the Committee may wish to take into account when considering this evidence given by O2 and Vodafone.

2.3  Wholesale versus retail competition

2.3.1  In response to questioning from Adrian Sanders MP about the wholesale operators controlling the price to MVNOs, Vodafone CEO Guy Lawrence replied that there was no evidence of price abuse by the wholesale operators and that "Ofcom has powers to control the market if any of the operators started abusing that, but there is no evidence that that happens". This is incorrect.

2.3.2  In their 2009 Mobile Evolution report[58] Ofcom found that "Some MVNOs stated that there are problems with securing wholesale network access and that Ofcom should consider imposing an 'access-related condition' to require MNOs to provide access on a fair reasonable and non-discriminatory (FRND) basis. Other MVNOs stated that it was difficult for new entrants to gain wholesale contracts due to the difficulty of negotiating wholesale contracts without an existing customer base". Furthermore, in a submission to the Ofcom consultation that preceded the Mobile Evolution report, Which? raised concerns about the impact a reduction in the number of mobile wholesale operators would have on competition and in particular the impact this would have on MVNOs, stating that further consolidation (after the merger of T Mobile and Orange) could weaken the bargaining power of MVNOs.[59]

2.3.3  The evidence from Which? and from MVNOs about wholesale negotiation supports Ofcom's conclusion that the spectrum auction must be structured so as to sustain four viable wholesale networks and thereby widen the wholesale choice available to MVNOs.

2.4  Ofcom's powers to intervene

2.4.1  As referenced above, Vodafone in their oral evidence told the Committee that Ofcom has the power to intervene should wholesale operators be found be abusing their wholesale position. This is technically correct, but the process that would lead to such an intervention would not be expeditious.

2.4.2  Unlike in the fixed market, where Ofcom has a range of regulatory interventions at its disposal should it believe that BT is abusing its wholesale position, Ofcom does not have an immediate regulatory lever though which it could correct an abuse. Instead, Ofcom would have to undertake a market review to establish the level of competition in a market. If a market is found not to be effectively competitive, Ofcom can impose the following Significant Market Power conditions under the Communications Act: Network access (including conditions about network pricing); and provisions for securing fairness and reasonableness in the way in which requests for network access from MVNOs are responded to.

2.4.3  The difficulty with a market review is the length of time it can take, with approximately three to six months for MVNOs to make a case that an intervention is required and for Ofcom to consult. This is followed by upwards of a year for a final decision and a possible further year if a decision is then appealed.

2.4.4  In the interim MVNOs would be left having to accept the terms imposed on them by the mobile wholesale provider, potentially to the detriment of consumers. This, however, is less of an issue where MVNOs have a larger range of wholesale providers to choose from and can switch to the provider offering better wholesale terms. By seeking to guarantee competition Ofcom may reduce the need for intervention after the event which would likely be costly and time consuming.

2.5  More wholesale providers lower prices

2.5.1  There is a clear correlation between fewer national mobile wholesalers and higher end user prices, regardless of the number of MVNOs with access agreements. Figure 12 in our response to Ofcom's consultation demonstrates the advantages of four wholesale player markets across Europe where there is an effective new entrant.[60]

2.6  Wholesale competition and service quality and innovation

2.6.1  Improved service quality is one of the key benefits of spectrum allocation. Presenting oral evidence to the committee on 5 July, Minister for Culture and Communications Ed Vaizey MP stated that "the point about getting spectrum out is about competition and the effectiveness of the service".[61] The way in which spectrum is allocated affects the quality of service. For example, in addition to lower prices, markets with four national mobile wholesalers demonstrate a better level of network quality (via innovation and penetration) than three player markets. Figure 13 in our response to Ofcom's consultation demonstrates the advantages of four player markets with effective new entrants.[62]

2.6.2  On a broader issue of competitiveness and innovation, the Committee heard in response to questioning from Tom Watson MP that the recently announced mobile payment joint venture between O2, Vodafone and Everything Everywhere had specifically excluded Three from joining the venture as a partner. We believe the exclusion of Three from this joint venture is not only contrary to the approach taken in other countries where all wholesale providers are partners in such a joint venture, but could be construed as indicative of a desire by the other mobile network operators to reduce the level of wholesale competition in the UK mobile market, and runs contrary to evidence given to the Committee by O2 CEO Ronan Dunne that the effectiveness of competition is defined by innovation.


3.1  On 19 May 2011 Rory Stewart MP led a debate calling for an increase of the coverage obligation attached to one 800MHz licence from 95% to 98%.[63] Mr Stewart's motion received strong backbench support. In oral evidence to the committee, neither Telefonica nor Vodafone objected to a coverage licence, however Telefonica did raise concerns about problems in providing coverage to the "last 4% or 5%" because "the returns become disproportionately lower and the cost becomes significantly higher".

3.2  The scale of investment required by Telefonica and Vodafone to achieve coverage levels upwards of 95% is far above what Three considers to be necessary. In their oral evidence, Telefonica calculated that it would cost an additional £540 million of public investment to provide indoor coverage to 98% of the UK population. Three calculates that it would cost £270 million of public investment to provide 99% of indoor coverage. The difference in projected costs, we believe, is the result of under-investment of Telefonica and Vodafone in their network infrastructure rather than, as suggested by Vodafone and Telefonica, the perceived difficulties in the UK's planning regime. Three, which possess over 12,600 sites, operates within the very same planning regime and yet we propose to extend our network by a further 3000 sites over the next three years.

3.3  Three supports the proposed 95% population coverage obligation and we believe that this could be extended to 97% without requiring public subsidy. However our technical modelling shows that the obligation would need to be attached to 2x10MHz of 800MHz spectrum, rather than the current proposal of 2x5MHz in order to achieve a speed of 2mbps.

3.4  When considering coverage obligations, the Committee might wish to take into account discussions around the coverage obligation that was placed on the 2100MHz licences awarded at auction in 2000. When the DTI consulted on the proposals for the auction of 2100MHz in 1997, they proposed an 80% coverage obligation. O2 was alone among the operators in objecting to the imposition of a coverage obligation; "As regards coverage, Cellnet is less convinced of the usefulness of defining coverage obligations. Consideration could be given, for example, to a 'let the market decide' approach".[64]

3.5  Having acquired a 2100MHz licence with an 80% coverage obligation, O2 then responded to Ofcom's 2006 consultation on how Ofcom would measure whether the coverage obligation has been met; "O2 does not believe that the terms of its licence and the content of the 3G Information Memorandum fetter Ofcom's discretion or provide a justification for ignoring the need to ensure that regulatory burdens remain objectively justified, proportionate, non-discriminatory and transparent as required by Article 6(1) of the Authorisation Directive".[65]

3.6  What O2 appear to suggest is that even when an operator has acquired a licence with a coverage obligation it should still be possible for that operator, after the award of the licence, to provide Ofcom with evidence that it would not be proportionate for that operator to meet that licence obligation.

3.7  All mobile operators apart from O2 met their coverage obligation by the deadline set by Ofcom. Ofcom granted O2 an extension to the deadline. Given this, the Committee may wish to consider the approach Ofcom will take to enforcing the coverage obligation on the 800MHz licence.


4.1  The Mobile operators were asked by Tom Watson MP what their annual licence fees were for the 900MHz and 1800MHz licences. Vodafone replied that their total yearly spectrum fee was £346 million. This is the licence fee for the 900MHz & 1800MHZ spectrum plus the amortised amount Vodafone include in their annual accounts for the purchase of their 2100MHz licence in 2000. A parliamentary question, tabled by Stephen Timms MP and answered by the Minister of State for Culture and Communications on 4 May 2011, revealed that both Vodafone and O2 pay £15,618,240 for their 900MHz and 1800MHz spectrum licences, of which £12,402,720 is for the 900MHz licences[66]. Therefore the bulk of the £346 million given in evidence by Vodafone relates to their 2100MHz licence which was paid for in full and no fee is payable on an annual basis to the UK Government.

4.2  In its evidence to the Committee, O2 said all operators had "made a major write-down of the value of spectrum". That is true of O2, but not of Vodafone. Therefore O2's annual spectrum costs will be lower than the £346 million cited by Vodafone. Although O2 failed to tell the Committee what its annual spectrum costs were, its annual licence fees are a matter of public record.[67] However these figures appear to be contradicted by oral evidence from O2 CEO, Ronan Dunne who told the committee "We paid £4 billion for our 3G licence and paid a similar amount for our 2G". Vodafone told the committee that it paid £25,000 for its 2G licence.

4.3  Ofcom in its evidence set out the rationale for linking the annual licence fees for the 900MHz & 1800MHz licences to the auction prices for 800MHz and 2.6GHz prices. Based on the German auction values, using the formula proposed by Ofcom would see licences fees rise as follows:

—  £105 million per annum for each of the licences for 2x17.5 Mhz of 900Mhz spectrum and £18.8 million for each of the licences for 2x5.8Mhz of 1800Mhz spectrum held by Vodafone and O2;

—  £146 million per annum for 2x45 MHz of 1800 Mhz spectrum held by Everything Everywhere taking into account the 25% of spectrum they must divest.

Total licence fees based on existing spectrum holdings of O2, Vodafone and Everything Everywhere would therefore be £356 million rather than the £64.5 million currently paid.

4.4  The Committee may wish to confirm in their report the actual amount paid in annual licence fees when reaching its conclusions on Ofcom's proposals for the setting of annual licence fees.


5.1  During the committee's oral evidence session on 28 June, Tom Watson MP suggested that O2 and Vodafone were indulging in "special pleading" in reference to the fact they possess 900MHz, 1800MHz and 2100MHz licences. In response to this, Telefonica told the committee that the operator is the "most efficient user of spectrum" since it serves the highest number of customers per MHz of spectrum. However, the number of customers per MHz is not a relevant measure of how efficiently an operator uses its spectrum. The most important measure of spectrum efficiency is how much data is carried using the spectrum.

5.2  Based on estimates by Enders Analysis[68] Three carries 50% of mobile data. Everything Everywhere carries 23%, Vodafone carries 14% and O2 carries 11%. This would suggest that Three is using its spectrum efficiently and in line with the requirements placed on Ofcom to ensure efficient use of spectrum. Despite carrying a disproportionate amount of traffic compared to its spectrum allocation, research shows that Three's network performs well. The respective ranking of UK operators against 94 other European operators also highlights Three's spectral efficiency. Vodafone and O2 (Telefonica UK) are mid table, Everything Everywhere (T-Mobile and Orange) are near the bottom of the rankings. Three ranks 14 out of 94.[69]


6.1  Much of the evidence given by Vodafone and O2 centred on their inability to use their existing spectrum to support 3G services.

6.2  In their written submissions to Ofcom's consultation, both parties claimed it would take around two years to clear 2G spectrum for 3G use. However the Committee were told that Telefonica had already switched on 3G services in London on 900MHz.

6.3  Furthermore, evidence from Turkey suggests that 2G customers can be supported on a minimum amount of spectrum. Turkish operator Turkcell that provides services in demographically and geographically similar environments to UK cities to 37 million[70] 2G customers using 11MHz[71] of 900MHz spectrum. Vodafone and O2 have 19 million and 22.3 million customers respectively, significantly fewer than the 37 million customers Turkcell support off significantly less spectrum than the 22.5MHz of 900Mhz and 1800MHz Vodafone and O2 hold. This would suggest that Vodafone and Telefonica could release significantly more than the 2x5MHz of 900MHz that O2 have currently deployed for 3G in London and still support their 2G customers.

6.4  The demand for 2G services is expected to drop to less than a quarter of its current level by Q4 2015. This is a point alluded to by Inmarsat during the 28 June oral evidence session, in response to Telefonica and Vodafone's concerns about 2G clearance. Mr Chris McLaughlin of Inmarsat told the committee that "I heard this morning that so many people are on 2G that they are never likely to want to be moved. I think the answer is the other way round. If the 3G network was there, they would get a 3G phone". Ofcom's most recent communication market report[72] found that 27% of adults and 47% of young people aged between 12 and 15 now own a smartphone. 59% of these consumers had acquired their smartphone in the previous twelve months.

6.5  The committee may wish to consider whether spectrum currently allocated is being used efficiently in line with Ofcom's obligations under the Communications Act.


7.1  The performance of networks operating in the 3G market place has reached a point where it is possible to offer a quality of service nearing that of 4G technologies at a considerably lower cost. The table below (extracted from our consultation response) shows the performance difference in megabits per second between the most recent development in 3G technology (HSPA+) and 4G (LTE). The performance differences are marginal in terms of the download speeds available to customers using a 3G network operating (HSPA+), which is available now and a customer using a 4G network (LTE), available in several years time.

Table 10

TechnologyMIMO usage Carrier six (MHz)Peak downlink data rates (Mbit/s)
HSPA+Single stream5 21
LTESingle stream5 22
HSPA+MIMO (2 X 2)5 42
LTEMIMO (2 x 2)5 43
HSPA+Single stream10 42
LTESingle stream10 43
HSPA+MIMO (2 x 2)10 84
LTEMIMO (2 x 2)10 86

Source: Analsys Mason.

(NB: MIMO refers to "Multiple In, Multiple out". This is the use of multiple antennas at both the transmitter and receiver to improve communication performance.)

7.2  The GSM suppliers association reports that there are currently 618 devices available that are compatible with HSPA+ in the 900MHz spectrum. Contrast this against the 98 4G devices currently in existence. These factors, combined with the opportunity for Vodafone and Telefonica to free up the majority of their 900MHz spectrum for 3G services means that they are in a very strong position to offer data services immediately to a market that is simply not practically addressable by Three and Everything Everywhere who have no low frequency spectrum.

7.3  The later arrival of 4G devices and the time it will take for them to penetrate the market, mean that it will be extremely difficult for Three to compete with the established tariffs and similar service levels available to Vodafone and Telefonica using their 900MHz spectrum.

7.2  Telefonica also claim that devices available for 4G services in 900MHz are not compatible with carrier sizes over 2x10MHz. If there is truly such a disadvantage to these holdings as claimed by Vodafone and Telefonica then they will be able to demonstrate this by surrendering their holdings and availing themselves of the spectrum floors currently proposed.

5 August 2011

58   Mobile Evolution-Mobile Market Assessment. Ofcom, December 2009

59   http://stakeholders.ofcom.org.uk/binaries/consultations/msa/responses/Which.pdf Back

60   http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf Pg 47. Back

61   http://www.publications.parliament.uk/pa/cm201012/cmselect/cmcumeds/uc1258-iii/uc125801.htm Back

62   http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf, Pg 48. Back

63   HC Deb, 19 May 2011, c557. Back

64   http://www.ofcom.org.uk/static/archive/ra/topics/pmc/consult/m_media/umts06.pdf, page 22.

65   http://stakeholders.ofcom.org.uk/binaries/consultations/3g_rollout/responses/O2.pdf Back

66   HC Deb, 4 May 2011, c753W. Back

67   HC Deb, 4 May 2011, c752W. Back

68   Enders Analysis 2010. Back

69   http://stakeholders.ofcom.org.uk/binaries/consultations/combined-award/responses/Three.pdf, Pg 125. Back

70   http://www.mobiadnews.com/?p=3279 Back

71   http://www.turkcell.com.tr/c/docs/announcements/announcements_2008_0620_fass_Additional_frequency.pdf Back

72   http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr11/UK_CMR_2011_FINAL.pdf Back

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Prepared 3 November 2011